Online Channel Competition in a Differentiated Goods Market

Conclusion

This chapter considered a Hotelling model that incorporates competition effects arising from offline firm entry into online channels by examining equilibrium outcome when offline firms compete in online markets. Comparison is made of the welfare loss from online channel entry. First, a symmetric case of two offline firms demonstrates that, compared to the case of pure online competition, the entry into an offline channel may reduce welfare depending on the magnitude of consumer’s transport costs relative to firm’s offline delivery costs. The analysis is extended to an asymmetric case where two offline firms supply different quality goods. The result for this case provides useful input for policymakers dealing with online markets. Further research needs to consider dynamic issues such as the impact of network effects of online business and the lock-in effect of offline channels. Other challenging issues that require examination are the strategic incentives of hybrid firms, e.g., a storage cost saving effect from multiple channels and a complementary effect of online channels from advertising and online experience.